Wolverine World Wide Inc (WWW) 2004 Q2 法說會逐字稿

Good morning and welcome to the Wolverine World Wide second-quarter conference call. All participants will be in a listen-only mode until the question-and-answer session of this conference call. This call is being recorded at the request of Wolverine. If anyone has any objections, you may disconnect at this time. I would now like to introduce Ms. Christi Cowden, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowden, you may proceed.

Thank you, Liz. Good morning and welcome to our second-quarter conference call. On the call today are Tim O'Donovan, our President and CEO, and Steve Gulis, our Executive Vice President and CFO. Other members of the Wolverine management team are sitting in as well.

Earlier this morning, we announced recorded second-quarter results. If you did not yet receive a copy of the press release, please call Stacey Craig (ph) at 616-233-0500 to have one faxed to you. The release is also available on many news sites or it can be viewed from our corporate Web site at www.WolverineWorldWide.com.

Before I turn the call over to Tim O'Donovan to comment on our results, I would like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by Securities laws. As a result, we must caution you that, as with any prediction or projection, there are a number of factors that could cause results to differ materially. These important risk factors are identified in the Company's SEC filings and in our press releases.

With that being said, I would like to now turn the call over to Tim.

Good morning and thanks for joining us today. I pleased to report our tenth consecutive quarter of record revenues and net earnings. Sales for the quarter of 198.8 million increased from the prior year by 8 percent, and earnings per share of 27 cents were up 4 cents for a 17.4 percent increase.

The Merrell business had another strong quarter with significant gains in both sales and earnings. Our global Hush Puppies and Wolverine Footwear Group businesses also achieved sales and profit increases during the quarter. With the exception of our Caterpillar business, which I will discuss in more detail in a few minutes, all of our other operations showed improvement in the quarter.

I was also pleased with the quality of our revenue growth in the second quarter, as sales of close-out and discontinued product were reduced by 2.8 million on the comparable quarter last year. Our narrower and deeper inventory strategy is paying dividends as we realize fewer markdowns and have a higher percentage of full-margin sales.

Turning to our key business units, the global Hush Puppies business achieved a load double-digit sales gain in the quarter with very strong results from our UK business, where the brand had excellent consumer response this spring to a number of new women's casual and tailored casual sandal offerings. For example, Hush Puppies was one of the top-performing brand in Schuh, a leading chain of fashion footwear stores with 39 locations in London and other major markets in the UK. The Hush Puppies brand is also performing well in leading UK department stores such as Harrods and Selfridges.

Hush Puppies sales were up low single digits in the U.S. and had mid-single digit increases in Canada and our other international markets.

We continue to feel strongly about the validity of our strategy to offer consumers more contemporary, higher-quality products supported by an aspirational brand image. In the U.S., we're continuing to make solid progress in upgrading our Hush Puppies distribution, particularly with Federated Department Stores, where the number of doors will be up to 188 for this coming fall season, versus 134 doors this past spring and 47 in fall of '03. We believe we will continue to grow Hush Puppies distribution based on current initial selling of fall, 2004 product, which has been delivered early, and very strong reaction to the spring 2005 collection that was presented at the recent New York Shoe Show.

In women's a new hand-sewn, whip-stitched moccasin collection with artisan details featuring vibrant colors and our worry-free suede was especially well received.

The Wolverine Footwear Group realized a mid single digit sales increase for the quarter with increases in the base uniform shoe and Harley-Davidson footwear businesses more than offsetting a decrease in the Wolverine boot business.

Bates enjoyed another very strong quarter on the strength of military uniform footwear sales to the Department of Defense as well as through military post-exchange stores. Sales also increased in the civilian uniform footwear category, where distribution in the big box sporting goods channel has been steadily growing.

Bates is building on its reputation for excellence in uniform footwear in a number of ways, including the relationships that have been established with all four U.S. military academies. The Bates team recently returned from outfitting all of the incoming classes (indiscernible) at Annapolis and provide similar services to other academies. Bates' strong reputation for innovation and quality in military uniform circles also creates opportunities for export sales. For example, Bates recently received two contracts to supply footwear to the Saudi Royal Navy.

Harley-Davidson opened 100 new points of sale during the quarter, including a number of upper-tier fashion footwear stores and a test at Dick's Sporting Goods. Sell-throughs by the Harley-Davidson dealer network remain strong. As these dealers open new locations and upgrade existing locations, they have successfully expanded their footwear sales. Our Harley-Davidson footwear team is in San Diego this week for one of the two annual Harley-Davidson dealer meetings. At this meeting, we will be introducing a number of new products, including functional products for real riders as well as fashion-right product for a broader audience of consumers who aspire to live the Harley-Davidson lifestyle.

As noted earlier, Wolverine boot sales were down in the quarter following a solid first quarter. This was caused primarily by our inability to meet demand for some key selling new products. We plan to remedy this during the second quarter and with a low double-digit order backlog as we enter the third quarter, we expect Wolverine to have a good second half.

While the impact will not be felt until '05, Wolverine will be introducing, at the August World Shoe Association Trade Show, a very innovative new boot construction named Wolverine Multishox. We are patenting this unique construction and supporting the introduction with a strong consumer marketing campaign. Wolverine revolutionized the work boot category with the introduction of Wolverine Durashocks comfort technology more than a decade ago. The new Wolverine Multishox project has been in development for over a year and we believe this unique comfort system, which provides durability and is 30 percent lighter than conventional work boots, will have strong consumer appeal. Retailers have voted Wolverine the Number One work boot brand for product design excellence for five consecutive years, and we're going to give them a reason to make it six.

Turning to the Caterpillar business, CAT footwear sales of the quarter were down in the mid-teens due principally to weakness in the European business. As I indicated in our first-quarter conference call, the response in Europe to the Caterpillar spring product line was not as strong as we had planned, and this weakness carried over into the second quarter.

While our business in Europe has been a challenge, first-half sales in the U.S. are up modestly and our international distributor business is quite strong, as several new distributors have come on board and sales through existing distributors have been very positive.

Looking forward to the fall season, our global CAT footwear backlog is up and we have a much better retailer response to our new product offerings, particularly the product featuring CAT's proprietary i-Technology comfort system. While we will likely miss our full-year sales and profit plan for CAT footwear business, we expect to achieve a stronger performance in the second half.

The Outdoor Group, which consists of the Merrell and Sebago businesses, had a very good second quarter and remains the Company's major growth driver. Merrell sales were up over 10 percent and profits up significantly. By region, Merrell sales in the U.S. and Europe were up double digits with sales in Canada down mid-single digits following a strong first-quarter performance. International distributor revenue was also up significantly.

From a product mix standpoint, Merrell's growth in the quarter was fueled by the multi-sport fashion athletic and sandal categories. Merrell sell-throughs with the majority of the brand's major accounts remains excellent with significant sales gains during the quarter coming from accounts such as REI, Nordstrom, Galyan's and Cabela's.

Significant progress was made during the quarter in rolling out additional shop-in-shops. Forty Merrell shop-in-shops were opened during the first half, bringing the total number of shop-in-shops to 100. We currently have retailer commitments for about 35 additional shop-in-shops to be opened in the back half of this year.

While all of this is exciting, the real news at Merrell is the Continuum project, the most ambitious and comprehensive product introduction in the history of the brand. In virtually every major segment of the line, Merrell has either innovated or recrafted product. The wide, sweeping changes to the line are the result of Merrell's management's intent to ensure that the momentum built in the last few years is not only maintained but intensified as Merrell continues to outpace the competition.

The underlying concept of Merrell Continuum is simplification of the design, selling and buying processes. This has been published by narrowing the focus of the line into two distinct segments, Outventure, the performance segment, and Transit, the casual segment. In the Transit segment, the line has been built around collections that are separate, distinct and appeal to different consumer needs and design philosophies. In the Outventure segment, the line has been designed in product silos that address the varying needs of outdoor enthusiasts. There are five distinct silos, hiking, multi-sport, Active Speed, Chameleon and Aqua Sports. Within each silo is a logical and evident progression of performance features from relatively light intended use, up through highly technical and intense use.

In addition, Merrell has adopted a strong conceptual stance with regard to the use of color. With the theme "Color You Can Trust" the Merrell color system allows the retailer to present a coordinated Merrell program with common color elements which cut across the product categories.

While there will be some of the new Continuum product delivered in the fourth quarter, the major impact will be in '05. Merrell's process of product innovation and product excellence, which has fueled a tenfold growth in the business over the past six years, will be taken to the next level with Merrell Continuum.

With regard to Sebago, we are ahead of our plans for this business for the first half. A good deal of work has been accomplished in establishing a correct logistical program to position the business for growth. During the second quarter, the remainder of the Sebago making operations were consolidated into our facilities in the Dominican Republic. This was the last major step in the integration process which began last November.

We're now focused on the important task of building great Sebago product and infusing the brand with energy and excitement. This process began in earnest with the Sebago product launch a few weeks ago to both domestic and international customers. There have been extensive line enhancements across categories that include an athletic marine offering, a new women's program, a Gore-Tex initiative for fourth-quarter delivery and updated boat shoe and dress casual collections.

While it is very early in the selling process, retailers appear receptive to the overall direction the brand is taking to reaffirm its position as a global leader in the premium marine and dress casual sectors of the footwear market.

With that beginning to give you some sense for what's going on in our brands, I'd now like to turn the call over to Steve Gulis, Wolverine's Executive Vice President and CFO, who will provide you with additional information about our results.

Thanks, Tim, and I would also like to thank everyone for joining this morning's call.

Earlier today, we were pleased to announce record second-quarter revenue and earnings. Net sales for the second quarter of 2004 totaled $198.8 million, an 8.0 percent increase over the $184 million reported for the same period of 2003.

Earnings per share for the quarter of 27 cents increased 17.4 percent over the 23 cents per share reported in 2003's second quarter.

For the year-to-date, revenue totaled $423.6 million, which equates to a 12.8 percent increase over the $375.5 million reported in 2003. Earnings per share totaled 57 cents per share in 2004 and compared to 41 cents per share in 2003 for a 39 percent increase. Year-to-date, earnings per share continue to exceed our plan and are being aided by strong gross margin improvement and operating margin expansion.

Our revenue growth continues to be fueled by the Outdoor Group, as the global Merrell business reported an 11 percent increase for the quarter and Sebago added 4 percent to the quarter's increase.

All components of the global Hush Puppies business had sales increases in the quarter, and the sales increase in the Wolverine Footwear Group was driven by strong military command.

Our North American wholesale operations improved sales by 4 percent, while European sales were down 0.8 percent, as currency gains of 1.5 percent were offset by lower shipments in the CAT European operation.

Reported gross margin for the quarter equaled 38.0 percent, which was a 230 basis point improvement over the 35.7 percent reported in 2003. In 2003, the second-quarter margin included costs incurred to close a manufacturing facility in Mexico and consolidate the operations into existing Dominican Republic facilities. The impact on the second quarter of 2003 was a reduction of 50 basis points on the quarter's gross margin. These costs were one-time and had a positive impact on 2004's comparison.

Additionally, (indiscernible) gross margins in the second quarter of 2004 were equal to or greater than 2003 for all operations within the Company. The overall gross margin improvement resulted from improvements in the Merrell and Hush Puppies global wholesale businesses, our branded slipper and leather operations. Reduced product cost in our international wholesale operations also had a favorable impact on the gross margin.

On a year-to-date basis, gross margin has improved 210 basis points. This improvement was impacted by the fourth-quarter 2003 slipper realignment and the closing of the Mexican operation noted earlier. These two items provided 120 basis points of the year-to-date improvement and the balance of the improvement resulted from margin improvements in our wholesale operations as we continue to upgrade product, improve initial margins and merchandise our lines more efficiently.

Consolidated selling and administrative expenses for the quarter were 29.3 percent of revenue, compared to 27.6 percent reported for the second quarter of 2003. We continue to increase our investment in the long-term success of your company by fueling marketing and product development initiatives for the branded operations.

For the quarter, our marketing spend increased 60 basis points as a percentage of revenue and our product development expense increased 50 basis points. We have invested heavily in new product initiatives, including the Merrell Continuum collection, CAT i-Tech, an entire new spring 2005 Sebago collection and continued upgrading of the U.S. Hush Puppies product offering. These product initiatives are being supported by strong marketing. The balance of the increase relates to profit-sharing and other employee benefit programs.

On a year-to-date basis, selling and administrative expenses for 2004 are 29.4 percent, compared to the 28.7 percent reported for the same period last year. The increase is a result of the items noted above. We are anticipating full-year selling and administrative expenses to be slightly higher as a percentage of revenue for 2004 as compared to 2003. However, we are forecasting expense leverage in the back half of 2004.

Interest expense continues to improve and was 0.4 million and $0.7 million less than 2003 for the second quarter and year-to-date respectively. The reduction reflects paydowns made in senior debt balances as principal payments of $15 million were made during fiscal 2003.

Record second-quarter 2004 earnings of $11 million produced earnings per share totaling 27 cents. This compares to earnings per share totaling 23 cents in the second quarter of 2003, for a 17.4 percent increase. On a year-to-date basis, earnings per share of 57 cents compared to 41 cents per share in 2003. This 39 percent increase reflects strong operating leverage being driven from sales growth and gross margin expansion.

For the second quarter, the net earnings calculation includes an estimated annualized income tax rate of 32 percent, and average shares outstanding of 40.8 million were used in the fully diluted EPS calculation.

From a balance sheet perspective, Accounts Receivable totaled $140.9 million at the end of the second quarter and is a $11.5 million reduction from the second-quarter 2003 level. We have improved our DSOs by 9.6 percent on a year-over-year basis, and our overall cash collection continues to be solid.

Inventories totaled $173.7 million at quarter end, an increase to $1.7 million or 1 percent over 2003 second-quarter levels. Our continued focus on inventory management is paying dividends, as we are merchandising our product lines much narrower but also much deeper. This allows us to service our customers while improving our inventory utilization.

We are pleased that we have reduced our overall investment in inventories and Accounts Receivable on a year-over-year basis by $9.8 million, while increasing our revenue base by 12.8 percent. Additional working capital efficiencies are being targeted for the remainder of the year.

Our strong operating results and balance sheet management have allowed us to produce approximately $38 million of cash flow from operating activities on a year-to-date basis. This reflects a $7.9 million improvement over 2003's first half. A portion of this cash was used to repurchase stock, as we repurchased 585,100 shares of stock for $15.3 million during the quarter. The average price paid was a 9.3 percent discount to our recent 52-week high, and we continue to feel that the repurchase program is a solid use of cash for our shareholders and complements the Company's other initiatives.

Our debt position at the close of the second quarter was $59.9 million and equals our year-end position. We will be making another $15 million of scheduled senior note principal paydowns during the back half of the year. Our total debt to total capital ratio equals 12.2 percent, and we ended the quarter with cash of approximately $63 million, resulting in a net cash position of $3.6 million.

All of these efforts have assisted us in improving several of our core operating ratios. On a year-to-date basis, we have increased our operating margins to 8.6 percent versus the 7.2 percent which was reported at the same time in 2003. We are on track to reach our plan of operating margins approximating 10 percent for the full year of 2004.

On a trailing 12-month basis, we have improved our return on assets to 10.1 percent, which is 130 a basis point improvement over 2003 levels. Additionally, our return on equity has improved 100 basis points to 14.0 percent. Both of these key ratios are trending toward our interim goals of ROA in excess of 10 percent and ROE of 15 percent.

Looking towards the back half of the year, we are starting with a strong backlog position, as we are currently up 17 percent. This backlog should allow us to obtain our sales range of 960 to $980 million, which requires a mid to upper-single digit increase in the back half of the year. This is in line with our stated objectives.

Gross margin increases are expected to moderate in the back half of the year, as the year-over-year comparisons become more difficult. We maintained gross margin levels of 37.4 percent in the back half of 2003, and we are forecasting back-half improvements of 30 to 40 basis points.

Selling and Administrative Expenses are expected to obtain leverage of 20 to 30 basis points for the back half of 2004, and this would increase our annualized expenses as a percentage of revenue 10 to 20 basis points. This annualized increase would result from significant investment in marketing and product-development initiatives supporting our brands. Thus, our earnings per share for 2004 should range from $1.44 to $1.52 per share.

In closing, we continue to support our brand initiatives around the world while focusing on improving our financial model. We feel that the combination of double-digit EPS growth, strong cash generation, the strengthening of our balance sheet and consistent dividend increases will provide our shareholders with long-term gains.

I would now like to turn the call back to Tim for several closing comments.

Thanks, Steve. As Steve has indicated, we have a strong start to what we believe will be another record year. Given our strong first-half results and 17 percent increase in our order backlog, we remain confident that an 8 to 10 percent increase in full-year revenues and a 15 to 20 percent increase in full-year earnings per share are achievable goals for 2004.

Equally importantly, we are making significant investments in product and marketing initiatives across our brand portfolio that will set the stage for continued growth in 2005 and beyond.

We thank you for joining us this morning and will now turn the call back to the operator so we can take your questions.

(OPERATOR INSTRUCTIONS). Robert Drbul of Lehman Brothers.

Good morning. This is actually [Adam Abramson] calling in for Bob. I was hoping you guys could discuss the operating margins of the Hush Puppies business for the quarter. Also, what are the opportunities and drivers, going forward?

Adam, we don't give specific operating margins on each business. I think the real key for the Hush Puppies business in the U.S. though is that, as they continue to upgrade their product offerings, their initial margins going in have been but stronger and I think that that should continue. Additionally, they have been going through an inventory-management process to realign what they are offering to retail and the close-out levels that they have had have been much reduced, and that's also impacting their overall business.

I think the other thing that, from an operating margin perspective, as that business grows, the cost structure increases should be fairly minimal and we will get a lot of leverage off the selling structure within the Hush Puppies business.

So, we like the position that we have; we have very contemporary product in the market with strong initial margins. The real key for us is to get some sales growth going in that business so that we can lever the gross margins and the expense structure.

Thank you.

Jeff Edelman of UBS.

Three quick questions, Steve or Tim. First of all, the Merrell sales represented a noticeable slowdown from the first quarter. Was there some sort of shift in the timing of shipments there and/or is that partially responsible why we see the pickup in the backlog, going forward?

Jeff, I think a couple of things. One is that I think the Merrell business was, in terms of the spring season, was heavily front-end loaded. You know, we had very strong shipments in the first quarter and a number of our major Merrell accounts -- Merrell is becoming a very important part of their business, and they are doing a good job of helping us plan the business by giving us good advanced orders. So, we did begin the year with a strong Merrell backlog and those of front-end shipments were very heavy in the first quarter. I think, to some extent, that is a trend that we may see, going forward, particularly with Merrell, where we are -- because of the power of the brand and the performance, we are commanding more upfront orders with that brand in particular, and we will probably see stronger first-quarter/third-quarter results for Merrell on an ongoing basis.

Okay, good. Secondly, could you sort of contrast the increase in backlog with the sales expectations for the back half? Would the sales be more inflated in the third quarter overall because of what you just said, or does it represent a larger percentage of fill-in business?

Our back half typically represents a pretty strong selling business, particularly our fourth quarter. You know, and anticipating those levels of fill-ins is not always easy to do. You know, we had very strong fill-in orders in the first quarter, somewhat less strong in the second quarter than what we experienced in the first quarter. I think we planned reasonably conservative levels of fill-in in our back-half plan.

Okay. Finally, as retail has reported a slowing in sales in June, do you have any sense that inventories of your product lines are at all starting to come out of balance?

Jeff, no. I don't really believe they are. You know, we seem to be -- with our major account business, the response that we are getting to our product lines from them, the performance we've enjoyed this past spring has been quite good. I think there's a lot of confidence in our brands and our product offering, and I think that's best reflected when you see that level of backlog that we have as we ended the quarter. You know, very strong commitments made during our second quarter from a lot of retailers. Our level of incoming orders during our second quarter was up 20 percent in dollar volume from the comparable quarter of the prior year. A lot of that, you know, commitments for new products, new programs for the fall season.

Great, thank you very much.

Lee Backus of Buckingham Research Group.

Good quarter, guys. Nice increase, good backlog. Could you discuss some of the management changes that have been going in the Caterpillar group, both domestically and internationally, and some of the management changes that have taken place internationally?

Sure, Lee. In late last year, we picked one of our most senior executives, Blake Krueger, who was an Executive Vice President of our company, and in addition to his responsibilities for our retail business, gave Blake the responsibility for the global Caterpillar business. The reason we made that move late last year is we really believe there is a major opportunity for this brand and that that kind of strong leadership was going to be necessary to take us to the next level.

In our European business, we have just very recently recruited a new senior executive to lead the CAT business in Europe. He's been at the job only a couple of weeks but this is a very seasoned industry executive who held major responsibilities in Europe in the past for Timberland and Reebok, and we believe that he's an excellent person who is going to help us take full advantage of the opportunity for the Caterpillar business in Europe.

You made some changes domestically too?

Yes, like taking over the U.S. business, the previous person we had running the U.S. business specifically has left the Company and Blake has assumed that responsibility directly.

Okay. Also, with respect to guidance, the comments that you've given sort of indicate that you didn't really talk about Q3 versus Q4; the comments that you gave sort of indicated that you expect a stronger Q3 than Q4.

We never comment on any quarter specifically. We always give annualized guidance. But I think that's going to be up to everybody else. Tim did make the comment that, you know, we have some strong programs going into the third quarter but we still, overall, we do rely on a lot of at-once activity in our business. That really has a lot to do with how strong a particular quarter can or cannot be.

Yes, but that reorder business is stronger in Q4 than Q3, right?

Yes. Historically, it has been.

Scott Krasik of C. L. King.

Good morning. I guess, first on Hush Puppies, can you break it out between the increase in North America for the newer fashion-forward product increases versus the traditional soft styles?

Sure, Scott. We are driving increases in that more fashion-forward product. That's offsetting some businesses that, frankly, we are moving away from that our lower-priced mandate, comfort product that had been part of the Hush Puppies line and that we're transitioning into that sub-brand that you just referred to with soft style.

Would the fashion-forwards be up double digits, high single digits?

The more fashion-forward things I would say, in general terms, are up; I would say high single digits would be a good overall assessment of it. I think another way that -- if we look at, for example, the average price in our U.S. Hush Puppies business, our sales through the first half of this year, the average price is up almost 10 percent. I think that's a reflection of this change in mix.

Okay, good. What's driving the Hush Puppies UK business? Are you selling some of the better product there or is that still the traditional --?

No, it's being driven by the more fashion-forward product, Scott. I would say, in terms of the overall global positioning efforts for Hush Puppies, in the UK market, it was one of the very first places that we really began to execute the strategy of upgrading the product, giving it a higher fashion content, higher quality. So, we've been at it a little longer in the UK and in Canada than we have in the U.S. market, and we are really getting some very strong traction right now in the UK, in the UK market. We are getting placement in some excellent distribution channels.

The one chain I referred to, Schuh, this is -- Hush Puppies in that channel of distribution is sitting right beside other brands like Puma or Diesel and performing extremely well. So, I think we're learning some things from what's going on in the UK and hopefully, we can apply some of those lessons in the U.S. to try to further accelerate our strategy in the U.S.

Okay, good. Then on Merrell, I guess you're going to be in about 50 Finish Lines for back-to-school. You know, if you could just give us some sort of color on what you expect for that, what styles you expect to be hot and maybe how you chose the stores that you are going to be in?

Sure. While it was obviously a collaborative effort with the management at Finish Line and the timing, Scott, is not back-to-school; it will be in the fourth quarter.

Okay. Was that pushed back or was that --?

I think that was pretty much the timing to begin with. We also -- there was an awful lot of excitement about some of the new Merrell product coming into the line and we want to include some of that and also the mix so that has had some influence on the timing also.

Okay. Then just lastly, if you could talk about the Track 'N Trail stores -- have you opened any more? I guess you're at four or six or -- (multiple speakers) -- are they still comping positively or have they slowed down with the whole -- (multiple speakers)?

No, they are comping positively. We only have two stores right now where we have comp results, but those comp results for the first half were up -- dropped low double digits, so that's good. We have six stores open now and five more commitments made in the back half, two of which will probably open in Q3 and three in Q4.

You know, it's still a learning process but we like what we see so far and as we get a few more stores and have some experience in some different kinds of locations, you know, I think we will -- by the time we get to the end of the year, we will have a lot more information about how well we're doing and whether we have an economic opportunity here that would call for a more aggressive stance.

In terms of store openings?

Yes.

Okay, good. Thanks, guys. Good -- (multiple speakers).

John Shanley of Susquehanna Financial.

Tim, I wonder if you can give us a little more color on the European Merrell business. Did it outperform -- you said double-digit sales gains in both the U.S. and European market. Is Europe growing at about the same pace or is it growing a little faster than the U.S. -- (Multiple Speakers)?

For the first half, John, it grew at a faster pace. We are just doing very well in the accounts where we placed the product in the sporting goods channels like decathlon and (indiscernible) sports, Black's, (indiscernible) in the UK, we're just doing very, very well in those channels. We would believe that Europe is going to be the fastest-growing part of the Merrell business for the foreseeable future just because it's quite a relatively early stage of development other than in the UK.

Are the forward orders for Merrell stronger in the European market than they are domestically as well?

The forward orders for Merrell are good pretty much across the board. You know, not dramatic differences by market but certainly we are looking at upper-teens backlog across most regions of the world for Merrell.

You mentioned the Canadian business was a little bit soft. How important is Canada for Merrell? What is the reason for the softness there?

John, I think it's a very good market for Merrell but if we take it as a percentage of our total sales, just due to the size of the market, it would be 7, 8 percent of our sales at best but we have an excellent position, excellent distribution. Again, I think what happened in Canada was more timing. Corzani (ph) group is a very important customers up ours in Canada, and we had a very strong first quarter with a lot of initial shipments of spring product to Corzani (ph) and our other major customers in that market, so I think it was basically they had brought in and planned spring season and front-end loaded it with a lot of new product that we shipped in the first quarter.

Turning to the Hush Puppies business for a minute, you mentioned some really great growth that's occurring in Federated with the Hush Puppies product line. Are you getting equal growth in Dillard's and some of the other chains like Nordstrom's, or is it pretty much -- (multiple speakers)?

Right now, John, it's certainly more Federated is where we're seeing the biggest growth. We have seen some growth in our business with Nordstrom also, but we just don't have the breadth of doors in Nordstrom. We're focused in Nordstrom right now more in the capital region, but we're hopeful of creating some other opportunities because we are performing well in the capital region. If we maintain that kind of performance, hopefully that will get some of the other regions of Nordstrom to give us an opportunity.

Turning to Penney's with soft style, a number of SKUs about the same as you've had in Penney stores or is there any change that's noteworthy in terms of how the Hush Puppies product line is doing in that particular retail chain?

No, the business with J.C. Penney for Hush Puppies is quite good. That product continues to perform. We work very proactively with them in terms of the styling in that product to update the styling on the product to make it more desirable. That product has retailed very, very well and we would expect to see that business continue to do just fine.

That's great. Steve, I just wanted to get a feeling in terms of whether there is any foreseeable pension adjustment clause (ph) that we should factor into our models, or basically is that all behind us now?

For '04 our costs are fixed. We still have to figure out -- you know, our next measurement date will be September 30th of '04 -- of '05, -- no, of '04 for '05, okay? We will have to wait and see where interest rates are and what our market performance on our investment portfolio is, but we're not anticipating anything like what occurred in 2002 and 2003.

Okay. When will we get a read to see if for '05 would be the fourth quarter?

Normally, with our fourth-quarter conference call, John, we will give some overall guidance, not just on pension but the overall business forecast for '05.

Okay. The last question I have is, on the 17 percent increase in order backlog, can you give me a sense in terms of how big a chunk of that is the Wolverine brand, or brands component? Is that a major component of this strong backlog position?

John, it is and I think the other comment about the backlog in general is we have a solid increase in the Hush Puppies backlog. We have a very good increase in the Wolverine Footwear Group backlog, including Wolverine boots and shoes. We have an increase in our Caterpillar backlog, and we have a very healthy increase in the Merrell backlog.

So it's across the board -- (multiple speakers)?

It is broadly across the board, which is -- we like that situation.

Thanks a lot. I appreciate it.

Mitch Kummetz of D.A. Davidson.

First of all, with the Merrell Continuum, can you just highlight what you hope to accomplish with the merchandising changes that you're making there? Is it more so to continue to drive the sales growth, or is it more to get better gross margins out of that business, or some combination of the two?

Mitch, it's principally to drive continued growth of that business. You know, the Merrell team has really done an excellent job of broadening that product line to appeal to a broader group of consumers, both in terms of gender and in terms of the end use for the product. As we've built a major casual component to that product line, it's obviously been the sales provider.

The thing that Continuum really does is it revolutionizes, we believe, the performance outdoor segment of the product line. It is an entirely different way to think about it; it's an entirely different way to build the product line. The retailer response to it is very strong and I think it does a couple of things. It solidifies Merrell's leadership position in the performance segment of our product line; I think it provides retailers with a very impactful presentation of Merrell product that's easy to understand, easy for the people on the sales floor to present to consumers. It reinforces what we're doing with Merrell shop-in-shops by having an end-use specific silos of product all beautifully color-coordinated that, when you see it up on the wall in a retail store, it's very, very powerful. I would call it a preemptive strike in terms of product innovation in the whole outdoor category, and if we execute it the way I think we will, we are going to have a position for Merrell that is going to be second to none.

So you would expect that to help you achieve better penetration with existing accounts then?

Absolutely. I think, based on previews that the Merrell team has had with some of their key accounts, both here in Europe and with our distributors around the world, we are getting a very strong response to it.

Okay. Secondly, you've given a fair amount of color on your backlog, but I just wanted to drill down in one area, and that is CAT. You are expecting a turnaround in that business in the second half, backlog being up, up both in Europe and the U.S., or I guess I should say UK and U.S.?

In terms of the backlog?

Yes.

Yes, it's up in both in our international distributor business, in the U.S. and in Europe. The strongest increase is in the U.S.; the most modest is in Europe.

Then two other items, this one for Steve. You've given a lot of color on the guidance. Could you help us out a little bit on what you expect the share count and the interest to be for the year?

Interest should stay proportionally with the improvements that we've seen to date, Mitch. Our overall outstanding debt would be about $15 million less than it was year-ago levels, okay? I think we have a 4 million, $4.5 million payment in August and then the last 10.5 million scheduled senior debt payment is in December, okay? That's the same schedule that it was last year, so you'll see that.

From a share-count perspective, I would say the 41 million shares outstanding is a pretty good number.

Okay. Lastly, just to help me reconcile the difference between your backlog and your back-half sales guidance, Tim, you mentioned that you are forecasting conservative levels of fill-in, which would partly explain that. But how much is currency and maybe the timing of the Sebago acquisition? How much are those two items having an impact on the difference there?

I would say they certainly have some impact. As we are beginning to anniversary stronger currency situation, around August is where really I think it adds the most impact last year, so that's going to moderate considerably. It already did moderate in the second quarter and that's going to continue in the third and fourth quarter. You know, Sebago business is a first-half weighted business. Because of the boat shoe content of that product line, particularly in our international business, it skews much more heavily towards the first half than the back half.

Are there any other items that I'm leaving out? I don't know. I think you might be going up against a difficult Harley-Davidson comp in the back half. Are there any other items that could explain the difference between the sales -- (multiple speakers)?

I think the only other item that -- you know, if we look at -- if you look at our fourth quarter last year, we had quite a strong fourth quarter, quite strong reorders in the fourth quarter last year, so I think there is some tougher comparisons (sic) when we get into (inaudible) in the fourth quarter.

A follow-up from Scott Krasik of C.L. King.

Just a couple of quick questions on the Wolverine Footwear Group -- first, on Bates, I guess you announced a pretty good deal, a $19 million new deal with the Armed Forces. In addition, Danner announced a $5 million contract; LOCO announced a $19 million contract. How should we view these things? Are you bidding for the whole pot and this is what they give out? Are some of the contracts more favorable than others? How should we view this news as it comes out?

I think, Scott, a couple of things is, one, almost all of these contracts are multi-year contracts; some run as much as five years. When the Department of Defense announces some of these contracts, they tend to have a minimum and a maximum quantity. They tend to pick the maximum quantity and multiply it by the number of years of the contract, so you get some relatively large numbers showing up as the value of these contracts. But we bid selectively on these contracts. Certain areas where we try -- we like not to be in the commodity business; we like to be in the value-added business.

I would say the other thing in thinking about this is that the contracts -- we hold a variety of contracts right now. At any given time, it may vary between seven and nine contracts. They are multi-year contracts. While certainly there can be some ups and downs here, looking out to the future, whether we will experience the same kind of growth we've experienced the last couple of years, I think things will more likely become not quite as -- not the level of demand but I think the base of the business is actually quite solid.

Are you getting the penetration in both the civilian and police and things like that categories, as well as the Armed Forces, or what's really driving the growth now?

It's a combination of really three segments to the business. One segment is the contract business; one segment is we have had and continue to dominate the footwear category in all of the military PX exchanges. We are the sole supplier to all four of the military academies. We have some other business with the military that is not in the bid category, where we've historically been a very strong player.

Then the other area is the civilian uniform piece of the business. We are building some great product in that category. We've leveraged the use of some of our Wolverine boot technologies into that category. In addition to uniform specialty stores, we have begun to build a business with some of big box sporting goods stores like Sports Authority, for example.

Okay. Is the civilian -- is there a sense that you're taking market share in that category, or --? Is it very --?

It's a very narrow niche where we are, I think, becoming a much more important player. My sense is yes, I think we're taking some market share in that civilian category.

Okay. Then just on the Wolverine boots in particular, you said that you had some trouble meeting demand on certain product. Was that specifically with one retailer or was that several retailers, and if you could just explain what happened there?

Scott, it was a category of product. We introduced a program of Gor-Tex work boots and the sell-through was very strong in that category. These are not cold weather boots per se; these are year-round use. That product we source offshore, and it is a longer leadtime product and our ability to get back into that product prevented us from probably realizing some stronger reorders in the second quarter than would've been available to us. We had another important product programs also, or a fairly technical program and our ability to replenish it quickly was just not there, so that had some negative impact on our second-quarter results.

Do you think those will get picked up in the third quarter, or you may have lost some of those due to seasonality and things like that?

It's always possible you lose some but I think the best indicator of that business right now is that we have a double-digit backlog in our Wolverine boots and shoes business as we ended the second quarter, so there's a healthy backlog there and you know, I think that should bode well for a better back-half performance.

Okay. Thanks, guys.

Sam Pozer (ph) with Mosaic Research.

Good morning. A follow-up on the Continuum group -- after originally showing it, has the response to the product -- any surprises from people that you thought would like it and didn't or who didn't expect to and really went after any new channels, things like that?

We expect them all to like it, Sam! (LAUGHTER). No, we've had a very good response. I think it's a different way to think about the product in that particular category. I think the aligned logic that the Merrell team has developed for it is appealing to people, particularly -- and this is -- while there is product here that's going to appeal to all of our Merrell accounts, it's particularly relevant I think to the outdoor specialty stores who want a performance story. Because the key here is that, in each of these product categories that have a specific end-use, we are giving the retailer and ultimately the consumer a choice of performance features but all with a common theme, all with a common styling philosophy. But if the consumer wants a hiking shoe to do something that's less-intense, we've got the product for them; if they want to do something very intense, we've got the product for them. It makes it very easy for the people on the sales floor to explain the features and benefits and meet any individual consumer's needs. I think it makes it easy for the retailer to buy it and easy for them to present it and easy for the people on the sales floor to ultimately sell it to the consumer.

How about in more fashion like department store businesses? Have any more fashion houses or fashion retailers -- moving towards different kinds of product than they have in the past as they've seen it?

I think one thing that's happening in that, you know, our business with Nordstrom this year is doing very well with those kinds of accounts, with a lot of the more fashion-forward independent stores. One category within Merrell that we think has a lot of potential with those kinds of accounts is the sprints (ph) category, which is low-profile, if you will, fashion athletic, (indiscernible) influence kinds of product. While Merrell has done a major rework of the whole outdoor performance part of the product line, they haven't ignored that part of the line, and we have a lot of new product in that segment. That segment of the line has been particularly important in driving our European business as well as our business in markets like Japan and Hong Kong. I think, in this market, we're still at a relatively early stage of developing that particular product segment.

Along those questions, where is Caterpillar? I know you are making a lot of changes there that you are starting to see the increases in the backlogs. Where is it in the picture of where it needs to be?

I think we've made some good progress. You know, the bookings for fall are solid, so I think it's -- we're heading in the right direction, I would say. We are probably a third of the way through really getting that brand positioned the way we would like to have it.

Thanks very much.

A follow-up from Jeff Edelman of UBS.

Thank you. Just a quickie, Steve. Is there anything you see in the complexion of your gross margin or SG&A in the third or fourth quarters as we compare it to last year's third or fourth quarters that would suggest an uneven distribution of whatever improvement we expect to see?

You know, Jeff, I think that the fact that we have much stronger gross margins in the back half of last year compared to the first half -- but I think that we should see proportionate increases on the back half of this year. I don't see anything in there.

You know, from a timing of SG&A, we're still continuing to -- we've still got some costs associated with some of our product development initiatives that may be a little bit more third quarter than fourth quarter but overall, I think things should be relatively proportionate.

Very helpful. Thank you.

Thank you. At this time, we have no further questions. I would now like to turn the call over to Ms. Christi Cowden. Ms. Cowden, you may proceed.

Thank you. On behalf of Wolverine World Wide, I would like to thank you for joining us today and as a reminder, our conference call replay is available on our Web site at www.WolverineWorldWide.com. The replay will be available through July 28, 2004. This concludes our conference call and thank you very much for participating. Good day.

Thank you for your participation in today's presentation. Have a good day.